One of the most significant tax developments still impacting corporations is South Dakota v. Wayfair. This monumental Supreme Court decision gave states more latitude to collect sales tax on out-of-state businesses. What if your business has not filed corporate tax returns in states where you should have? What do you have to do in order to come clean? On this episode of “Unique Perspectives – The DGC Podcast,” our guest is Scott Thomas, JD, LLM, a Consultant at DGC. Scott discusses what corporations should do if they need to file returns in other states or what they should do if they are unsure where they stand.
You can listen to the episode by using the Soundcloud player above or click here.
Here is a partial transcript of Scott’s interview with host Tom Annino:
Tom Annino: Let’s begin here: When and where should corporations file state tax returns?
Scott Thomas: States can reach out and pull you in if you are outside of the state. They can pull you in for tax purposes if you have a physical presence in the state, and now after Wayfair, if you have an economic presence in the state. What physical presence means is if you have people or assets in the state, and the economic presence test that might get you pulled into a particular state means you have sufficient sales or transactions in that state. The states have set that number at about $100,000 in most states (sometimes $200,000 in others) and either 100 or 200 transactions.
TA: The one word that sums up why this issue is popping up more and more is, “Wayfair.”
ST: That’s exactly right. When South Dakota v. Wayfair came out, it was a decision where the Supreme Court changed the standard. It used to be that barring the fact that you had a physical presence in a state, that state could not reach out and impose a sales tax collection requirement on you. That’s why Wayfair and other retailers were not charging sales tax to you when you made purchases online. As a result of the Wayfair decision the states were able to change their state laws and, in compliance with Wayfair, they set those economic presence standards. If you meet either the transactions or sales thresholds, you have a sales and use tax reporting requirement. The income tax side is a little different. Sometimes there are additional protections that federal law applies for you but that’s still your starting point when you’re thinking about whether you’ve got to file a tax return. Do I have economic presence in this state and do I have physical presence in this state? Now either or may get you on a state’s radar.
TA: If I am a corporation that’s unsure about where I need to file state returns, how will I know if a state is going to question my filing responsibility?
ST: The way they let you know is they send you a letter. Attached to that letter is something called a Nexus Questionnaire. It will be about five or six pages long. There will be a series of ‘yes’ or ‘no’ questions. Sometimes if you answer yes, they also ask for what date you started doing this. The way they are written, they are written quite vague. There a couple of questions that once you read it, you may want to answer it one way but it has an implication that you are going to have to file a tax return. That might not be the correct response. One ‘yes’ answer could mean that you have to file tax returns in that state or the state will come after you for not filing a tax return. What not to do in these situations is sending the questionnaire back with a quick answer. If it’s not quite a ‘yes’ or ‘no,’ then don’t check either box and answer the question with words. If you have questions, that’s when you really need to get a tax professional involved for help.
It’s important for businesses to know that there is no statute of limitations running when corporations have not filed state returns. There are situations where a state can look back for an almost unlimited number of years if you have failed to file. Scott discusses how a business should respond in these situations and he reveals the longest amount of time he has seen a state look back at a business’ tax case (HINT – It spans multiple decades). Click here to listen to our entire interview with Scott.
To access our podcast archives, click here.
If you would like to get updates and alerts like this sent directly to your inbox, sign up here.